Shanghai C2C: Supporting Corporate Growth on a Global Stage In-house Counsel Best Practices (2)

More than 50 in-house and private practice lawyers recently met in Shanghai, in two parallel sessions, to discuss how corporate law departments can ensure their employers behave ethically. In the second of our two-part report of the event’s proceedings, we report on what role in-house lawyers believed they should play in their employers’ compliance programme - and what were the acceptable limits of such programmes.

When should corporate counsel become involved in compliance issues?

In most counsel to counsel events, there is a debate about whether compliance should be part of, or separate to, the legal function. On some occasions, this may simply be a matter of resourcing – companies with limited headcounts in a particular location may simply decide to combine the two functions. In other situations, a split may be made for strategic reasons. For example, it may be preferable to require the (normally more expensive) legally qualified legal team to engage in matters where their professional status as lawyers carries a specific benefit – especially in relation legal professional privilege, or their knowledge of the market for external counsel.

Unusually, during this debate, several speakers indicated they had developed a two-stage approach to compliance. That was, they would expect relevant line managers within their organisation to carry out an initial compliance evaluation, but then ask the legal department to become involved at a later stage. To facilitate this process, several had created preliminary compliance “checklists” that their various line managers could work through, before asking for their opinions. Not only did this relieve the initial “information gathering” burden from the legal department, it also allowed these other stakeholders to carry out an initial evaluation of whether the deal they were proposing actually made commercial or ethical sense.

From the comments at those at both seminars, this two-stage process appeared to be particularly prevalent when a new commercial arrangement was being planned – for example, the company hoped to engage a new agent or distributor. Here, one of the main aims of the checklist was to “weed out” undesirable organisations that it may not be in the companies’ interests to do business with, particularly in relation to FCPA compliance. Several speakers appeared nervous about any vicarious liability that may arise out of doing business with questionable third parties. As a result, it was felt that the checklist was a useful way of forcing internal stakeholders to address these concerns directly.

Another crucial point at which compliance can be injected into the corporate decision-making process is during the stage at which commercial contracts are being prepared. This could be achieved in two ways: firstly, the legal department could insist that its sales team only use the company’s approved standard form contracts. By banning any alternation to these standard terms without the express approval of the legal department, companies can help the company avoid exposure to any unexpected liability issues arising from such alternations. Secondly, the legal department could use IT systems to enforce a requirement that all contract templates must only be downloaded from the company’s intranet, rather than allowing employees to use old versions of these documents, stored on their local PC. If this requirement is enforced, the company can minimise the risks that its employees are using out-of-date versions of its standard form contracts. “Our employees must visit our company server to download our contract templates when preparing a contract because the server maintains the latest contract templates approved by the legal department,” said Benjamin Huang, legal counsel to Bayer (China) Ltd.

When is “enough?”

With the world economy under sustained pressure, several speakers believed their legal department was heading into a perfect storm. On the one hand, companies were becoming more risk-adverse. This meant they increasingly requested assurance from the legal department that they were fully compliant, just in case they were subject to a regulatory investigation. On the other hand, falling profits invariably meant pressure to reduce overheads – and in-house lawyers or compliance officers can be expensive to employ. “Some business people will attempt to cut corners, when pressure comes to increase the company’s revenue,” said one in-house counsel. “Some deals will be OK, some will not. Either way, the due diligence involved will lead to enhanced demand for legal services.”

For several speakers, the question was therefore how far should they go in facilitating deals about which they had lingering doubts. For one speaker, the basis for their position would be to consider how they would feel if asked to justify their decisions in a witness box. “I use a decision tree to help me make my decisions,” they said. “First, I ask is it legal? Then, is it ethical? Then, is it customary – is it in line with local business practices? Can I sleep well at night? Would I be embarrassed to see this in the newspaper? Sometimes, it’s better to sleep a little less – but sleep a little better.” For one in-house speaker, even private practice law firms were sometimes guilty of pushing marginal deals too far. “I am aware of respected US law firms who make my hair stand on end when I see their name on a deal,” they said. “We know they’re good lawyers, but we also know from experience that these guys will talk a deal to the edge of legality. It should be the job of outside lawyers to represent the institution they are instructed by, not just the people they are directly working with.”

“If firms have concerns about a particular deal, they should find a way to effectively communicate the risk issues to the institution they are advising,” they continued. “All too often, messages of concern don’t work their way up the chain of command, to reach those who have to sign the deal. These concerns are often only communicated to the bankers – who are remunerated when the deal is done. That’s a crazy situation to be in.”

Takeaways

■ Making departmental heads use compliance checklists to review their own business proposals can force them to address the consequences their decisions – and free up the legal department’s time to focus on more serious matters.

■ Reflect on what you consider the boundaries of acceptable behaviour, and communicate that position – both internally, and also to your external counsel.

In the first of our two-part report of the event’s proceedings, speakers discussed tactics used to persuade their colleagues that compliance is vital to their – and their employers’ - prosperity. The report also includes a discussion on arguments counsel could deploy to ensure their compliance programmes are properly funded – despite the current fall in corporate profits - and delivered click here.